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Merger Simulation with Brand-Level Margin Data: Extending PCAIDS with Nests

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  • Rubinfeld, Daniel L.
  • Epstein, Roy J.

Abstract

We present a method to calibrate empirically the demand parameters in a merger simulation model by using brand-level profit margin data. While the approach can be generalized, we develop these ideas within a particular framework — the PCAIDS (proportionality-calibrated AIDS) model. We show that the brand-level margins effectively define product “nests” (products that are especially close substitutes) and substantially increase the flexibility of PCAIDS for modeling critical own- and cross-price elasticities. The model is particularly valuable for transactions at the wholesale level (where scanner data do not exist) and for geographic markets that span national borders (where comparable data may not be available), since other methods to derive elasticities, particularly those based on econometric estimation, may not be possible or may not be reliable.

Suggested Citation

  • Rubinfeld, Daniel L. & Epstein, Roy J., 2003. "Merger Simulation with Brand-Level Margin Data: Extending PCAIDS with Nests," Berkeley Olin Program in Law & Economics, Working Paper Series qt9w99h2vd, Berkeley Olin Program in Law & Economics.
    • Handle: RePEc:cdl:oplwec:qt9w99h2vd
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    1. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 407-426, October.
    2. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    3. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, University Library of Munich, Germany.
    4. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    5. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
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    Cited by:

    1. Ricardo Medeiros de Castro, 2021. "Documento de Trabalho 01/2021- The problematic binary approach to the concept of dominance," Documentos de Trabalho 2021010, Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos.
    2. Ricardo Medeiros de Castro, 2021. "Documento de Trabalho 001/2021- The problematic binary approach to the concept of dominance," Documentos de Trabalho 12021, Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos.

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